Enhancing the IPO Onramp
The Act enhances the IPO “onramp” for companies to access public markets on a proper gradient. The Act helps resolve the 18-year dearth of $50.0 million and under public securities offerings. The >$50.0 million IPO market represented the overwhelming majority of IPO’s every year (between 60 to 90%) for thirty years. Restoration of this IPO market helps minimize the negative effects of computerization, which acts as a disincentive in the small IPO market.
Creation of Venture Exchanges
The Act creates a new form of stock exchange known as a “venture exchange” which falls under the regulatory oversight of the Securities Exchange Commission (“SEC”), using the exact same regulatory oversight rules as current national securities exchanges. A venture exchange may, after application and approval by the SEC, have the authority to list “venture securities” for purchase and sale.
Creation of Venture Securities
A “venture security” is a newly created form of security under the Act authorizing venture exchanges to conduct the purchase and sale of these specialized securities in two main categories of securities. Common to all venture securities is the obligation to comply with Sarbanes-Oxley, Dodd-Frank, Regulation NMS and state blue sky laws.
Venture Security Category #1
Section 12(b) Securities – Under the first category, companies (known as “issuers”) may register their stock under the 1933 Securities Act and thereafter list their stock on a national market stock exchange. Issuers with listed securities on a national market stock exchange are known as “Section 12(b) reporting companies.” An issuer must register pursuant to Section 12(b) if it elects to list a class of securities (debt or equity) on a national securities exchange, e.g., the Nasdaq, the New York Stock Exchange or other national securities exchange. Typically, when an issuer undertakes an initial public offering (“IPO”), it also lists its securities for trading on a national securities exchange. A Section 12(b) registration statement filed with the SEC must be effective prior to an issuer listing its securities on an exchange.
In the case of Section 12(b) venture securities, the exact same protections, laws, and regulations governing the purchase and sale of securities that exist today remain unmodified except that a national securities exchange may create a “listing tier” of these new securities. Under the Act, issuers of Section 12(b) venture securities may not have more than $2.0 billion in public float (which means the combined total value of publicly owned securities) before being required to “upgrade” to a national securities exchange. The Act permits national securities exchanges to list these “larger” private companies who are, by comparison, small in relation to national exchange-listed pubic companies. A national exchange can create a listing tier without compromising the minimum listing size and other requirements for listing on a national exchange.
Venture Security Category #2
Section 3(b) Securities – In the second category, private securities known as Section 3(b) exempt private securities are classified as venture securities permitting them to be purchased and sold on a venture exchange. Under the Act:
“A security that is exempt from registration pursuant to section 3(b) of the Securities Act of 1933 shall be exempt from section 12(a) of this title to the extent such securities are traded on a venture exchange, if the issuer of such security is in compliance with —
‘‘(A) all disclosure obligations of such section 3(b) and the regulations issued under such section; and
(B) ongoing disclosure obligations of the applicable venture exchange that are similar to those provided by an issuer under Tier 2 of Regulation A.”
Three important changes are created under the Act enhancing access to markets for issuers and enhancing protections for investors:
Benefit of the Act #1
Because of the total restriction on purchase and sale of any unregistered securities under Section 12(a), the purchase and sale of private securities is not currently available on any stock exchange (and in some cases not even through stock brokerages). Section 12(a) of the Securities Exchange Act of 1934 prohibits the sale of any unregistered security as follows:
“(a) It shall be unlawful . . . to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange in accordance with the provisions of this title and the rules and regulations thereunder.”
Under the Act, venture securities may now be quoted, purchased and sold in a free and open capital market never before permitted under the securities laws. Exemption from Section 12(a) is a significant change creating an open, safe, regulated market for private securities.
Benefit of the Act #2
The Act obligates an issuer to comply with all disclosure requirements under the Securities Exchange Act of 1934 for issuance of private securities under section 3(b). This change creates new regulatory and enforcement powers for the SEC. Currently, an investor’s protection for a private issuer’s failure to meet adequate disclosure requirements under section 3(b) is a lawsuit under state law or state securities regulator penalties. If the issuer is not compliant with disclosure requirements, the venture exchange must suspend trading the security and the SEC now possesses authority to enforce this provision.
Benefit of the Act #3
The Act obligates a venture exchange to create rules for disclosure of issuer information consistent with the existing laws. This provision obligates the venture exchange to act as a self-regulatory body for compliance with a listed company’s disclosure of information under the direct oversight of the SEC. The Act grants investor protection which has never before existed in the private capital markets. The venture exchange obligation to assure that private securities comply with disclosure requirements or the venture exchange or they may not transact purchase or sales of the securities is an unprecedented level of investor protection. Further, the newly created privilege to quote and arrange for the purchase and sale of venture securities simultaneously creates a new, untapped marketplace for liquidity in the capital markets opening secure investment opportunities to the American investing public.